Do not make an offer on a property until you have read this.
- Ramit Sethi is a well-known financial expert and founder of I will teach you to be rich.
- Sethi thought about how to tell if you’re ready to buy a house.
- He thinks you’ll need a hefty down payment and a plan to live there for a decade.
Rami Sethi is an entrepreneur and financial expert who created the popular blog, I will teach you to be rich. Sethi has shared ample financial advice on some of the key decisions people make when it comes to managing money. Not surprisingly, he weighed when you should buy a home.
Sethi believes it’s crucial for people considering buying a property to make sure they’re really ready to do so. As he wrote on his to blog“Buying a home has been sold as an important part of the American Dream, but for many people it doesn’t make sense for financial or lifestyle reasons.”
You don’t want to buy a house if you are one of those people who are not in a good position to buy it. Luckily, Sethi has shared some tips on how to determine if home ownership is the right choice for you.
Sethi believes you should ask yourself five key questions to determine if you’re ready to buy a home
To determine if you’re ready for homeownership, Sethi says you should ask yourself these five questions:
- Are you staying in the property for a decade? Sethi believes it’s important to make sure you’re staying in your home for a long time before buying, as there are high transaction costs and fees associated with a sale. If you’re only staying for a short time, he believes, you’re “almost certainly going to lose money” and you’re better off renting and investing in an S&P 500 index fund with the money you’d otherwise use on your home down payment and mortgage costs.
- Can you keep housing costs below 28% of gross monthly income? Sethi warns that if your housing costs exceed 28% of gross income, you could become “overwhelmed with expenses”. Gross income is before taxes and housing expenses include your mortgage, property taxes, and insurance.
- Do you have to deposit 20% of the value of your home? According to Sethi’s blog, if you don’t have a 20% down payment, you’re “not ready to buy a house.” He believes you’ll face additional costs for personal mortgage insurance, as well as because he thinks it’s important to get into the saving habit before you become a homeowner so you’re prepared for unexpected expenses.
- Will you be financially okay if the house goes down in value? Real estate won’t always go up in value, Sethi explains, further suggesting that you can often make more money by investing in other assets. You should not buy a property if you expect the price to go up.
- Are you excited to become a homeowner? Finally, Sethi makes it clear that you shouldn’t buy a house because you feel pressured, but only make that big decision if you really want to.
Should you listen to Sethi’s advice?
Much of Sethi’s advice makes financial sense, and it’s definitely worth asking yourself these questions when making one of the most important financial decisions of your life. You should pay particular attention to his suggestion of keeping total housing costs below 28% of your income – both to qualify for the most competitive mortgage rate and to ensure you don’t overextend yourself.
However, you may not necessarily want to defer home ownership in all circumstances where he recommends waiting. Making a 10-year plan is difficult for many people — and most experts suggest that if you stay indoors for at least two to five years, it could be worth the purchase.
While a 20% down payment is definitely ideal and the gold standard, it can be impossible to achieve in some markets and you may not always want to wait until you have that much to pay when it means it will take decades until you can move into a property.
The bottom line is that everyone should carefully assess their own financial readiness to buy a home – and approach this great commitment with their eyes wide open.
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